The Canadian dollar has lost its foothold and weakens throughout the market. Paired with the American currency, the Canadian fell to a one-and-a-half year high, testing at the moment which is already at the 34th figure. Moreover, considering the fundamental and technical picture of the USD/CAD pair, it can be assumed that the potential of the upward movement is not yet exhausted and in the medium term, we will see “looney” in the area of 1.3550.
The starting point of the northern impulse was the December meeting of the Bank of Canada, the results of which disappointed traders. But the Canadian has weakened long before that – since the beginning of October in tandem with the US dollar. It lost more than 400 points, showing a correlation with the oil market. The events of the last week only strengthened the position of the bulls of the pair, after which they managed to overcome quite strong resistance levels.
Thus, against the background of cheaper oil, a very weak release on the growth of the Canadian economy was published last week. For the first time since January of this year, GDP growth fell to a negative area (on a monthly basis) while in annual terms the indicator updated the two-year minimum. The decline in production rates in almost all sectors producing goods was the main reason for the decline in the key indicator of the economy. In addition, the level of oil and gas production has once again decreased, with a more significant decline in the reporting period than in the previous months. Half of the industrial sectors (10 out of 20) showed a slowdown, which in fact could affect the overall GDP indicator.
The structure of this indicator also suggests that in September the growth of household spending slowed down after it increased in the previous quarter. In addition, over the past nine months, a decline in demand for cars has been recorded as a result of which expenditures on durable goods fell by 0.7%.
Such dynamics expectedly disappointed traders. After all, after quite good data on the growth of Canadian inflation, market participants fueled the hope that the Bank of Canada would retain its “hawkish” attitude and even hint at further steps to tighten monetary policy. The consumer price index on a monthly basis showed an unexpected increase of 0.3% in October. In annual terms, a positive trend was recorded similarly up to 2.4%. The core inflation also increased significantly up to 0.4% m/m and 1.5% g/g. Therefore, traders’ corresponding hopes for the “hawkish” position of the regulator were fully justified, despite the decline in the oil market.
However, the reality turned out to be somewhat different as the Bank of Canada focused its attention primarily on the existing risks. The regulator stated that since the previous meeting, oil prices have declined substantially, reflecting the uncertainty about the growth of the world economy. According to the Central Bank, the momentum of economic growth dried out in the fourth quarter and activity in the energy sector of Canada will be significantly below forecasts. In addition, the regulator mentioned other negative factors such as decline in investment attractiveness, a likely decrease in price pressure, a contradictory situation in the housing market, and so on.
In general, the Bank of Canada has come to the disappointing conclusion that the situation in the oil market is putting pressure not only on trade indicators but also on key macroeconomic indicators such as inflation and GDP. In other words, the regulator directly linked the dynamics of the oil market with the prospects for further tightening of monetary policy. Although the correlation of USD/CAD with oil prices was observed before, now the influence of this fundamental factor will increase.
The concerns of traders in connection with this circumstance are well founded. Just today, Austria is hosting a meeting of OPEC representatives, whose members are trying to agree on a reduction in oil production by 1.3-1.4 million barrels per day. In this case, the cost of a barrel will return roughly to the level of $ 70-75, providing support to commodity currencies, including the Canadian dollar. At the moment, representatives of the Cartel expect Russia to respond to such prospects and if agreed, the Russian Federation will have to cut production by 250,000 barrels per day. According to rumors, the Russian side is not ready to support this initiative, although there are no official statements on this issue yet. If Moscow really refuses, then oil will go down again, and in turn, the USD/CAD pair will test new resistance levels.
From a technical point of view, the priority is also the growth of the pair and on all the “older” timeframes – D1, W1, and MN. Hence, the price exceeded the upper line of the Bollinger Bands indicator, and the Ichimoku Kinko Hyo indicator formed a bullish signal “Parade of lines” on the daily chart. On the other hand, the priority of the northern scenario is also visible on the weekly chart. The pair also broke through the upper line of the Bollinger Bands indicator and the price is above the Kumo cloud. The monthly chart indicates that the price is between the middle and upper lines of the Bollinger Bands indicator -that is, the subsequent growth may be more ambitious – up to the level of 1.3540 on the upper line of the above indicator on the monthly chart.
The material has been provided by InstaForex Company – www.instaforex.com